Week # 5 Savings Vechicles, FHSAs & TFSA

Learning Objectives

• Understand different types of savings vehicles (registered & non-registered).

• Explore the benefits of Tax-Free Savings Accounts (TFSAs) and the First Home Savings Account (FHSAs).

Overview of Savings Vehicles

Types of savings vehicles

• Registered Accounts

  • Provide tax advantages.

• Non-Registered Accounts

  • Genereally referred to as "Taxable" or "Open" accounts.

Registered Accounts

• Registered Retirement Savings Plan (RRSP)

• Registered Education Savings Plan (RESP)

• First Home Savings Account (FHSA)

• Tax-Free Savings Account (TFSA)

Non-Registered Accounts

Characteristics

• Unlimited contributions with flexible withdrawals.

• Contributions are not tax deductible.

• Yearly tax filing required; income earned is subject to taxes (interest, dividends, capital gains).

• No creditor protection.

• Useful for those who have maxed out contributions on RRSP or TFSA.

Registered Retirement Savings Plan (RRSP)

Overview

• A retirement savings account registered with CRA under the Income Tax Act.

• Purpose: designed specifically for retirement savings.

• No minimum age to open; max age for contributions ends at 71 years.

• At age 71, RRSP matures and converts to a Registered Retirement Income Fund (RRIF).

Government Incentives

• Contribute up to 18% of previous year's earned income, capped at $32,490 for 2025.

• Contribution reduces taxable income, providing immediate tax savings equal to Contribution Amount x Marginal Tax Rate (MTR).

• Deadline for contributions is March 1st (60 days after year-end).

• Income earned within RRSP compounds tax-free.

• Withdrawals made during retirement are generally at a lower MTR.

First Home Savings Account (FHSA)

Purpose and Basics

• Designed for first-time home buyers.

• Contributions and earnings are tax-deductible and tax-free, respectively.

• Eligibility: Canadian residents aged 18-71 who are buying their first home.

Contribution Limits and Conditions

• First-year contribution limit: $8,000.

• Lifetime contribution limit: $40,000.

• Unused contribution room carries forward to the following year.

• Yearly deadline for contributions is December 31.

• Excess contributions incur a tax of 1% per month on the highest excess amount.

Withdrawals

• Tax-free withdrawals can be made for qualifying home purchases.

• Conditions must be met to ensure non-taxable status of withdrawals.

• If not used for qualifying purchases within 15 years, account must be closed or transferred tax-deferred into an RRSP or RRIF.

Closing an FHSA Account

• The account must close by:

  • December 31 of the year following the first qualifying withdrawal, or

  • 15 years after opening, or

  • When the holder turns 71.

• In the event of the holder's death, the account must be closed in the exempt period which ends December 31st of the year following the year of death.

FHSA Beneficiaries

• Types of beneficiaries include designated beneficiaries, survivors (spouses), and charities.

• Beneficiaries need to declare benefits received as taxable income.

• If no beneficiary is named, the amounts are treated as income of the estate.

Tax Free Savings Account (TFSA)

Basics

• Introduced in 2009.

• Allows Canadians aged 18 and over to save and invest tax-free, contributing up to $7,000 per year (2025).

• Funds can be withdrawn for any purpose at any time.

Advantages

• All investment gains (interest, dividends, capital gains) are tax-free.

• Withdrawals do not impact taxable income.

• No effect on eligibility for government benefits.

Contributions and Withdrawals

• Contributions made with after-tax dollars; non-deductible.

• Withdrawals do not affect future contribution room, added back for the following calendar year.

Contribution Limits Example

• Contributions allow for both cash and in-kind assets.

Specific Examples of Contribution Limits

• Yearly limits range from $5,000 to $7,000 from 2009 to 2025; cumulative contributions can vary accordingly.

Over Contributions and Penalties

• Exceeding contributions results in a 1% penalty per month on the excess amount.

• Examples illustrate different scenarios involving penalties and usage of contributions.

Taxation Upon Death of Holder

• Generally, no tax is owed; TFSA becomes part of deceased’s estate.

• Rollover or distribution rules apply to beneficiaries and successor holders.

Comparing RRSPs and TFSAs

• RRSP: Tax deductible; contribution deadlines apply; taxable upon withdrawal.

• TFSA: Not tax deductible; contributions are unlimited and not taxed upon withdrawal.

Summary of Savings Vehicles

• Types include Non-registered accounts, RRSP, FHSA, and TFSA.

• FHSA caters specifically to first-time home buyers with tax-deductible contributions.

• TFSA serves as a versatile account without specific intended use; contributions are tax-free, with indefinite carry-forward on unused amounts.

Next Steps

• Online quiz due by Sunday 11:59 pm.

• Prepare for upcoming classes discussing education savings and Test #2.